Why HNW College Families Should File the FAFSA

by Drew Schlotter, CFP®, CCFC

For those of you with kids in college or getting ready to start college, you probably know that financial aid filing for the 2024-2025 school year has not gone smoothly. That is due to the FAFSA Simplification Act that was passed last year. As the name implies, it was supposed to simplify the financial aid process and they basically stripped out a whole bunch of questions out of the Free Application For Student Aid (FAFSA). Unfortunately, the restructuring of the process has resulted in significant delays. They are working on fixing the issues, but for families applying for student aid this cycle, the process has been anything but simple.

Probably the number one question that I get from high net worth families regarding the FAFSA or student aid of any sort is, why should I even bother? Many families feel their net worth, and/or income, will prevent their student from qualifying for any student aid. Today we're going to talk about the three reasons why even high net worth families should apply for student aid using the FAFSA.

1. Some schools require the forms to still be filled out, even to distribute their own institutional merit based financial aid. Sources of college funding like scholarships, tuition discounts, and any number of different merit based aid still require you to fill out the FAFSA.

2. If something happens and for whatever reason you aren't able to liquidate the assets that you were planning on using to paying for college you are not going to be eligible for any sort of federal assistance or student aid programs if you did not fill out the FAFSA. You want to make sure that you filled out the FAFSA so you qualify for aid in case of emergency, and you're not able to fund college the way you'd originally intended to.

3.  Not all schools award financial aid based on financial need. Sometimes the FAFSA is just one step in the process. There are also some types of financial aid that aren't need-based, but they still require you to fill out the FAFSA. Direct student loans are one of those. If you are going to utilize Direct Federal Student Loans, you need to fill out the FAFSA.

Now, you may be thinking I'm planning on paying for college for my children out of pocket. Why do I need to worry about qualifying for student aid or federal student loans? There are a couple of reasons for this.

I actually know some situations where the child went to undergraduate school, they had everything saved up, the parents were planning on paying for that out of pocket, so they didn't worry about filing the FAFSA or applying for any student loans. The student was able to make it through undergrad without taking out any student loans whatsoever. Everything was paid for, but they decided to go on and pursue a master's degree. They didn't have enough saved up for master's degree. The plan was for the student to pay their own way through the master's. At this point, they felt the student was an independent and self-sufficient adult. The plan was for the student to use a mix of student aid (as they had little to no income or assets) and student loans to fund their graduate degree. Instead, they found that there was no need-based aid available to the student at all. They appealed to the school, but the graduate school looked to see during their undergrad if they'd taken out any student loans, and found that the student hadn't taken out student loans and hadn't applied for student aid during their undergraduate program. The school used that as one of their reasons for declining the appeal for more student aid.

You want to make sure that you are taking full advantage of any student aid available to you during undergrad. That includes using any student loans that may be available. If you are planning on paying for your student loans out of pocket, consider taking out the student loans, then pay it back immediately. You've taken advantage of the aid offered to you by the schools, but because you paid the loan off with the cash you planned to fund college with, there's no interest accruing. It doesn't cost you anything other than the time it takes you to fill out the paperwork. In the future you, if need to apply for need-based aid or need to appeal for additional funding, the schools will be more inclined to help you in the future, An additional benefit to this strategy is the potential to start building your student’s credit score.

 I hope this was helpful. In my opinion, it's important for any family sending their children to college to make sure that they fill out the FAFSA every year, regardless of whether you think you need financial aid or not.

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